Item-level RFID reaches into the DC

Driven by dreams of improving inventory accuracy at the store, more and more large retailers are experimenting with item-level RFID tagging: Macy's, Marks & Spencer, Bloomingdale's, Walmart ... the list goes on.

In many cases, those experiments have produced impressive results. Because RFID tags can be scanned more quickly than bar codes, they give retailers a much more accurate picture of what the store has in stock and where it is. This makes it easier for a sales associate to quickly find the size 8 tall boot-cut jeans a customer is looking for—and reduces the chance the customer will leave the store empty-handed. Some experts say item-level tagging can lead to a sales lift in the low double-digits for the affected items. "It's proven to be a strong business case," says Mark Wheeler, director of industry solutions at Motorola Solutions, which provides tags, readers, and antennas for the RFID market.

But almost all the activity around item-level tagging has been occurring in the store, not in the distribution center. "Where the scanning is happening is on the store floor," says Mike Liard, vice president of VDC Research's auto ID practice. "While that's great at giving you visibility into your current in-store inventory, we still need greater visibility back into the supply chain."

Leading-edge companies are very aware of this and are already looking to extend item-level tagging back through the supply chain, says Kurt Mensch, RFID product manager for Intermec, which offers RFID readers, printers, tags, labels, and inlays. So it follows that distribution centers might want to start thinking now about how the technology could affect their operations.

SLAP AND SHIP
For many DCs, their first involvement with item-level RFID comes when they're asked to start applying tags to a select group of stock-keeping units (SKUs) before shipping them out to stores: the old "slap and ship" model.

When a retailer is only tagging a few high-value items or those bound for a few select stores, it makes more sense to tag the items at the DC than at the garment factory or manufacturing plant. What usually happens is the DC sets up a value-added service line that will tag, say, 100 pairs of jeans going to the pilot stores, says Mark Hill of Avery Dennison, a supplier of RFID tags and printers.

Typically, this entails having workers scan the item's existing bar code with a handheld reader to get its UPC, or universal product code. The reader then connects with a system in the cloud that can assign a unique number to that particular item and send that information to a printer at the DC. The printer then spits out the RFID tag, which is slapped on the item before it's sent out to the store.

In most of these cases, the DCs are not using their RFID capabilities to improve their own operations. While a company could install fixed RFID scanners to, say, check outgoing shipments for accuracy, it wouldn't make financial sense if only a few pilot SKUs are tagged.

Things will start to change, however, as retailers start expanding their use of RFID technology beyond the pilot stage. When a greater percentage of the SKUs require tags—for example, all jeans bound for Macy's stores, not just a few pilot locations—it becomes more economical to move the tagging process out of the DC and back to the manufacturing plant or garment factory, says Hill. (For more information on how to decide when it's time to make the switch, see the sidebar "The tipping point.")

Once SKUs are coming into the DC with tags already applied, it begins to make sense for distribution centers to look at how they can use the tags to improve their internal operations, says Wheeler. Some DCs are looking at installing an RFID scanning tunnel—a fixed RFID scanner that's embedded into a tunnel positioned over a conveyor, for example. These scanning tunnels would then be used in the inspection of inbound shipments, says Hill. Instead of having employees open up 10 percent of the boxes in an inbound shipment to conduct a manual count, the scan tunnel can automatically do a count of 100 percent of the inbound cartons.

By automating the process, RFID makes these checks faster and more accurate, says Mensch. "Our customers that are deploying RFID are seeing direct improvement to their bottom line," he says.

Yet to get a return on investment for the hardware involved, companies must be tagging a high volume of items, with the tags applied at the source, says Bruce Stubbs, director of industry marketing for distribution center operations at Intermec.

Hill agrees. "We haven't seen anyone implementing item-level RFID just for improving incoming inspection at the DC," he says, noting that such a move simply wouldn't pay off. "But if the company has already made the investment in the tag to get the accuracy benefit in the store, the incremental investment in the scanning portal is not that much."

Scan tunnels and readers can also be used on the outbound side to ensure the accuracy of a DC's outgoing shipments. "DCs do a very good job of ensuring inventory accuracy of their shipments out to the stores, but quite often it's very labor intensive, involving multiple levels of checkers," says Hill. "But if I have RFID on all of the items, I can do all my picks and do an automatic scan of the carton label on the way out to make sure all the items are there."

As an example of how this might work, Hill cites a pilot the Department of Defense is conducting with vendors that assemble kits given to recruits heading out to basic training. The vendors are using RFID readers under packing tables to make sure the right items are placed in the kits.

WHERE DO WE GO FROM HERE?
While the use of item-level tags in stores has been heating up in the last three years, things have been moving more slowly at DCs. "It's great that RFID is being adopted in [the apparel] sector, but we need to look closer at how we can enable distribution organizations to tap into the technology and leverage it—to use it to do more data- or information-sharing throughout the supply chain," says Liard. "That's beginning to happen but not as fast as we'd like."

What may kick adoption rates up a notch is the growing trend toward omnichannel retailing—or the effort to provide a consistent retailing experience across all retail channels: brick-and-mortar stores, websites, catalogs, and mobile devices. According to Hill, accurate inventory is the foundation for omnichannel retailing. If you want to offer customers the option of ordering a product online and picking it up at the store or if you want to push a coupon to customers via their mobile devices, you need to make sure you actually have the item in stock.

Item-level tagging allows retailers to conduct inventory counts more easily and quickly than they can with bar codes alone. In fact, with item-level tagging, inventory accuracy levels typically jump to 95 percent, says Hill. This means retailers can confidently offer customers the option to pick up in the store, for example.

To make all this happen, Liard says that companies must start talking with their partners about how they're going to use the data they'll now have at their fingertips. "We know that RFID can help with better visibility, anti-counterfeiting, and theft protection," he says. "But how are we going to share that information? What information is important to me as a distribution center versus you as a manufacturer or you as a retailer? That's what DCs need to start being concerned about."

The tipping point

As item-level RFID tagging moves out of the pilot phase and into more widespread use, it makes sense to move the tagging process out of the DC and back to the manufacturing plant or garment factory. But how do you know whether you've reached that tipping point?

Some basic back-of-the-envelope calculations can help you make that call, says Mark Hill of Avery Dennison, a supplier of RFID tags and printers. Let's conservatively estimate that an RFID tag costs 15 cents per item, and, assuming the DC is in the U.S. or Europe, labor and overhead come to 30 cents per item. That means the total cost for tagging goods at the DC is 45 cents per item. If you're only tagging 10 percent of the items, the cost equals out to 4.5 cents per item, compared with 15 cents per item if all goods are tagged at the source (labor costs tend to be negligible at the factory because RFID chips can be incorporated into existing hang tags or care labels). This means it's worth the extra cost to tag at the DC during the pilot stage.

"In the U.S. and Europe, the cost of labor and overhead is probably more than the cost of tag," Hill says. "If 10 percent of my goods need an RFID tag, I'm just going to do a value-added service line. But if it's 60 percent, I could save money by having tags put on every item at the source and open up the opportunity to have visibility throughout my supply chain."

About the Author

Susan K. LacefieldEditor at Large
Susan Lacefield has been working for supply chain publications since 1999. Before joining DC VELOCITY, she was an associate editor for Supply Chain Management Review and wrote for Logistics Management magazine. She holds a master's degree in English.More articles by Susan K. Lacefield

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